11
Productivity Stagnation and Low Human Capital Productivity Stagnation and Low Human Capital Investment in a Wealthy Economy: The Case of ItalyInvestment in a Wealthy Economy: The Case of Italy
Invited presentation at the Third World KLEMS conference organized by RIETIInvited presentation at the Third World KLEMS conference organized by RIETI and Harvard university, Department of Economics in Tokyo, 19-20 May 2014 .and Harvard university, Department of Economics in Tokyo, 19-20 May 2014 .
Carlo MilanaBirkbeck College, University of London E-mail: [email protected]
22
OverviewOverview
II. Measurement problems and proposed solution
III. Empirical results
I. Defining the productivity problem in Italy
VI. Concluding remarks
33
OverviewOverview
II. Measurement problems and proposed solution
III. Empirical results
I. Defining the productivity problem in Italy
VI. Concluding remarks
Table 1. Nominal tangible assets per capitaTable 1. Nominal tangible assets per capita
USA Japan U.K. Germany Italy
Nominal tangible assets per capita 1995 2000 2005 2010
Gross internal rate of return (percent) 1995 2000 2005 2010
(USA = 100) 100.0 158.0 73.5 105.0 113.1 100.0 155.0 71.0 109.0 120.0 100.0 154.0 69.6 119.6 133.5 100.0 150.0 67.0 117.0 129.0 6.3 4.2 5.7 4.6 3.6 8.5 4.9 5.9 6.9 5.9 11.8 6.0 6.7 7.7 5.3 7.0 4.7 5.0 4.5 4.0 44
99
OverviewOverview
II. Measurement problems and proposed solution
III. Empirical results
I. Defining the productivity problem in Italy
VI. Concluding remarks
1010
Related contributionsRelated contributionsAfriat’s Afriat’s minimum (maximum) path chained Laspeyers (Paasche) index numbersminimum (maximum) path chained Laspeyers (Paasche) index numbers are are very close to the following contributions combined together:very close to the following contributions combined together:
Dale W. Jorgenson and Zvi Griliches (1967)Dale W. Jorgenson and Zvi Griliches (1967), “The Explanation of Productivity Change”, , “The Explanation of Productivity Change”, Review of Economic Review of Economic Studies Studies 34: 249-283.34: 249-283.
Dale W. Jorgenson and Zvi Griliches (1971)Dale W. Jorgenson and Zvi Griliches (1971), “Divisia Index Numbers and Productivity Measurement”, , “Divisia Index Numbers and Productivity Measurement”, Review of Review of Income and WealthIncome and Wealth , pp. 227-229, who wrote: “The main advantage of a , pp. 227-229, who wrote: “The main advantage of a chain indexchain index is the reduction of errors is the reduction of errors of approximation as the economy moves from one production configuration to another. […] of approximation as the economy moves from one production configuration to another. […] The The Laspeyres approximationLaspeyres approximation to the Divisia index of total factor productivity was employed in our original to the Divisia index of total factor productivity was employed in our original study of productivity change (1967)”study of productivity change (1967)”
Samuelson and Swamy (1974, pp. 576)Samuelson and Swamy (1974, pp. 576) where it is stated that “Fisher missed the point made in where it is stated that “Fisher missed the point made in Samuelson (1947, p. 151) that Samuelson (1947, p. 151) that knowledge of a third situationknowledge of a third situation can add information relevant to can add information relevant to the comparison of two given situations”the comparison of two given situations”
Kruskal's Kruskal's Minimum Spanning TreeMinimum Spanning Tree recently proposed. See recently proposed. SeeHill, Robert J. (1999a)Hill, Robert J. (1999a), "Comparing Price Levels across Countries Using Minimum Spanning Trees", Review of , "Comparing Price Levels across Countries Using Minimum Spanning Trees", Review of Economics and Statistics 81: 135-142. Economics and Statistics 81: 135-142.
Hill, Robert J. (1999b)Hill, Robert J. (1999b), "International Comparisons using Spanning Trees", in A. Heston and , "International Comparisons using Spanning Trees", in A. Heston and R.E. Lipsey (eds.), International and Interarea Comparisons of Income, Output, and Prices, Studies in Income R.E. Lipsey (eds.), International and Interarea Comparisons of Income, Output, and Prices, Studies in Income and Wealth, Volume 61, NBER, Chicago: The University of Chicago Press.and Wealth, Volume 61, NBER, Chicago: The University of Chicago Press.
Hill, Robert J. (2001)Hill, Robert J. (2001), "Linking Countries and Regions using Chaining Methods and Spanning , "Linking Countries and Regions using Chaining Methods and Spanning Trees", prepared for the Joint World Bank-OECD Seminar on Purchasing Power Parities Trees", prepared for the Joint World Bank-OECD Seminar on Purchasing Power Parities -Recent Advances in Methods and Applications, Washington, D.C., 30th January-2nd February, 2001.Recent Advances in Methods and Applications, Washington, D.C., 30th January-2nd February, 2001.
1111
The upper bound of the aggregate input The upper bound of the aggregate input price index with two observationsprice index with two observations
A
B
Factor input 2
Factor input 1O
....A
C
BP
BL
P ray
L rayq1
q0
Input 2
Upper bound (Laspeyres-type)
Lower bound (Paasche-type)
Keynes’ method of limits
Input 1
1313
Extending a bilateral comparison to a Extending a bilateral comparison to a multilateral context (Afriat, 1981)multilateral context (Afriat, 1981)
A
C
B
Factor input 2
Factor input 1O
Upper bound (Laspeyres-type)
Lower bound (Paasche-type)
Input 2
Paasche limit
Laspeyres limit
P ray
L ray
Tightbounds
....A
C
BL
q1
q0
q2
Samuelson-Afriat tight bounds
...min ...ij ik kl mjkl m
M L L L
...max ...ij ik kl mjkl m
H K K K
1
jiM
=
1
jiM
Input 1
The inefficiency parameter et is found in the interval
( , ) ( ) ( )t t t t w x w x
The starting decomposition of the minimum costs are therefore obtained as cost-inefficiency parameter multiplied by observed total costs:
( , )t t t t ti ii
e w x w x
MethodologyThe search for meaningful economic measures The search for meaningful economic measures
simultaneously along the decomposition
1818
Laspeyres and Paasche matrices withLaspeyres and Paasche matrices withAfriat’s tight upper and lower bound matricesAfriat’s tight upper and lower bound matrices
1
1
1
1
434241
343231
242321
141312
LLL
LLL
LLL
LLL
L
1111
11
11
111
1
1111
342414
432313
423212
413121
LLL
LLL
LLL
LLL
P
1)()(
1)(
)(1
1
433243213243
34322132
34232321
342312231212
LLLLLL
LLLL
LLLL
LLLLLL
M
1111
11
11
111
1
1111
343423342312
43232312
32433212
213243213221
LLLLLL
LLLL
LLLL
LLLLLL
H
So that we have the following range of possible values:
rsrsrsrs LMHP measure True
/X Xij ij ij ij ij ij ijL e X X X K e
Scale elasticity and misallocation effect
for every i ≥ j
Finding Afriat efficiency index
Finding the scale elasticity :
where p is the output price and m is the pure profit margin
where L and K are respectively the Laspeyres and Paasche indexes
11,0 1 0 1,0
0
( ) / ( )e
EX Xe
x x
1,0
1,0 1,01( )SE EX
1,0 1,0
1,01,0 1,0
1,0
1,0
1 and increasing returns to scale ( >1)1 with
1 and decreasing returns to scale ( <1)
any (positive) and constant returns to
1 wit
h
EXSE
EX
EXSE
1,0
1,0
1,0 1,0
1,01,0 1,0
scale ( =1)
1 and any returns to scale
1 and decreasing returns to scale ( <1) 1 with
1 and increasing returns to scale ( >1)
EX
EXSE
EX
Scale effects on TFP
Decomposing Decomposing TFPTFP growth growth
1,01,0 1,0 1,0 0 1
1,0
= Y
TFP TC SE OC eX
where
0 0 0 1 1 11,0 1,0 1,0
0 0 1 1
(1 )e e
p y p y
w x w x
Output index Actual input index = Efficiency input index ∙Afriat efficiency index
Scale effect indexTechnical change index
Marginal elasticity of scale Potential gain in TFP level from removal of base-period “within” misallocation
2323
OverviewOverview
II. Measurement problems and proposed solution
III. Empirical results
I. Defining the productivity problem in Italy
VI. Concluding remarks
3030
Figure 11. Average growth rates of TFP, TC, and output loss due to misallocation, 1991-2010 (% p.a.)
3131
OverviewOverview
II. Measurement problems and proposed solution
III. Empirical results
I. Defining the productivity problem in Italy
VI. Concluding remarks
3232
In Italy, an underinvestment in human capital and other intangibles coupled with low rewards for high skilled labour had been part of misallocation of resources with a consistent output loss.
In intercountry comparisons, Italy appears to lag behind in productivity levels and growth rates notwithstanding its rich endowment of tangible assets.
A growth strategy based on the acceleration of investments in intangibles and particularly in human capital through education and professional skills seems the most appropriate solution of the Italian productivity problem.
Concluding remarks